Financial Services Commission Prepares Operation Plan for K-ICS Transitional Measures

[Asia Economy Reporter Song Hwajeong] On the 24th, the Financial Services Commission held the 9th meeting of the Insurance Capital Soundness Advancement Task Force, chaired by Vice Chairman Do Gyusang, to discuss the final plan for the new Solvency Regime (K-ICS) to be implemented alongside the new International Financial Reporting Standards (IFRS17) and the operation plan for transitional measures.

The Financial Services Commission has prepared the final plan for the introduction of K-ICS and the operation plan for transitional measures based on four quantitative impact assessments conducted so far.

According to the final plan, the K-ICS ratio is calculated as Available Capital / Required Capital. The numerator, Available Capital, is based on net assets (assets minus liabilities) evaluated at present value for both assets and liabilities, and to satisfy the principle of loss absorbency, certain items are adjusted from the net assets on the financial statements to calculate Available Capital. The denominator, Required Capital, includes new risks added compared to the existing Risk-Based Capital (RBC). It measures newly exposed risks due to the present value evaluation of insurance liabilities (increase in liabilities due to low-interest discount rates) and risks whose importance has increased due to recent environmental changes such as aging and major disasters. Additionally, to measure capital soundness more precisely, a shock scenario method is introduced for risk measurement, and the confidence level for risk estimates is raised from the current RBC level of 99.0% to 99.5%.

Under the K-ICS transitional measures, the scope of Available Capital recognition for capital securities issued before the implementation of K-ICS is expanded. Already issued hybrid capital securities and subordinated bonds, even if they do not meet the Available Capital requirements under K-ICS, will all be recognized as Available Capital. Furthermore, the increase in reserves due to the present value evaluation of insurance liabilities can be deducted from Available Capital gradually rather than all at once. Insurance risks newly recognized by insurance companies upon K-ICS introduction can also be recognized progressively during the transitional period. The increase in stock risk and interest rate risk caused by the upward adjustment of shock levels and changes in risk calculation methods can be recognized gradually as well. In the first year of implementation, only 60% of the calculated stock and interest rate risks are recognized as Required Capital, and the application ratio will be increased evenly during the transitional period.

To prevent the occurrence of insolvent companies solely due to the system change, if the K-ICS ratio applying transitional measures is below 100% but the existing RBC ratio exceeds 100%, prompt corrective actions will be deferred. However, insurance companies granted this deferral must enter into a management improvement agreement with the financial authorities, and if the terms of the agreement are not fulfilled, the deferral will be canceled.

With the implementation of IFRS17 in 2023, a comprehensive revision of related provisions in the Insurance Business Act, including supervisory accounting, insurance products, soundness systems, and actuarial systems, is necessary. At this meeting, amendments to the Insurance Business Supervision Regulations and Enforcement Rules related to the soundness system and business reports were prepared. The Financial Services Commission plans to implement the amendments from 2023 after going through procedures such as prior notice in the first quarter of this year. A Financial Services Commission official stated, "The financial authorities will actively support the passage of the Insurance Business Act in the National Assembly for the implementation of IFRS17 and proceed with the legislative amendments without delay. At the same time, they will closely monitor the impact analysis and industry preparation status for the implementation of IFRS17 and K-ICS and strengthen industry consulting, among other efforts."

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